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Foreclosures reforged

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    Edmund and Faith “Bobbie” Salas pose in front of the home they share with their son, Wayne Salas, who was able to modify his mortgage with a lower interest rate with his bank, thus saving his home from possible foreclosure.
    Applause greeted Gov. Neil Abercrombie’s signing of Senate Bill 651 on Thursday in his office. Now known as Act 48, the law protects homeowners facing foreclosure.
This story has been corrected.

Sweeping new measures to help financially struggling Hawaii homeowners avoid foreclosure became law last week.

Some observers are hailing the bill signed Thursday by Gov. Neil Abercrombie as one of the strongest in the nation and possibly a model for other states.

The bill, Senate Bill 651, is being touted as one of the highlights of the recently concluded legislative session, which was largely consumed by work on balancing the state budget.

"Sometimes when you’re faced with a crisis, you have to respond — and I think that’s what the administration and the Legislature is trying to do," said Stephen Levins, director of the state Office of Consumer Protection. "It dramatically changes the way (foreclosures) are going to be done in Hawaii."

The 101-page bill, now known as Act 48, overhauls state law on nonjudicial foreclosures, which is how the vast majority of home foreclosures are done in Hawaii.

The bill was one of roughly 30 related to foreclosures introduced at the Legislature this year and was shepherded by Rep. Bob Herkes, chairman of the House Consumer Protection and Commerce Committee, and Sen. Rosalyn Baker, chairwoman of the corresponding committee in the Senate.

Community-support group Faith Action for Community Equity pushed hard for the legislation. Some elements in the law also were recommended by a legislative task force representing lender and borrower interests, though lenders strongly opposed other parts including what is regarded as the most important piece of the new law.

That piece gives many homeowners a new option to conduct foreclosure mitigation efforts directly with a lender representative in front of a neutral dispute-resolution professional.

The law also ensures that homeowners receive enhanced notice of foreclosure actions and allows borrowers who contend a lender is improperly foreclosing to bring the case before a state judge.


• A home owner occupant subject to nonjudicial foreclosure may convert to judicial foreclosure by filing a petition with the Circuit Court within 30 days after receiving a foreclosure notice.

• Conversion to judicial foreclosure is not available to homeowners who participate in dispute resolution.

• Condominium associations may collect past due association assessments of up to $7,200.

• Mortgage servicers with a 20 percent market share in the state must maintain a local office.

Advocates of the reform measure note that it won’t help everyone facing foreclosure. In cases where a homeowner has lost his or her job and has no prospect of paying a reasonably reduced mortgage payment, foreclosure will likely be the outcome.

But the law promises to help significant numbers of people caught up in an epidemic.

Close to 24,000 foreclosure actions have been initiated in Hawaii over the past two years, according to real estate research firm RealtyTrac. Last year, 12,425 foreclosure cases equated to one for every 41 residences in the state, which was the 11th-highest rate nationally.

People in similar circumstances to city worker Wayne Salas stand to benefit from the new law.

Salas, whose wife works for the state, was concerned that double-barrel furloughs (city and state) would cut too deep into income they needed to maintain mortgage payments on their Ahuimanu house.

Salas sought help from his mortgage holder, Bank of America, in September 2009.

The waste-water treatment plant supervisor figured all he needed was a reduction in his 6.25 percent interest rate, which was set to rise next year. But bank representatives told him they couldn’t help because he hadn’t defaulted on his loan.

Salas, squeezed by the furloughs and the loss of some military pay, ended up defaulting. He sought to enter a loan modification program last year, but he said BofA put him on a waiting list because of a backlog and told him not to worry about foreclosure.

"The very next week, they posted an eviction notice on the house," Salas recalled. Scared and belabored by the lender’s debt collection agents, Salas arranged to borrow money from his retirement account to cure the delinquency plus penalties.

BofA relented on the foreclosure, Salas said, and enrolled him last July in the federal Making Home Affordable loan modification program for six months. After disputes over missing paperwork and proper payment amounts, nonprofit organization Hawaiian Community Assets began to negotiate for Salas.

Earlier this month — 20 months and four foreclosure notices after Salas reached out for help — BofA agreed to lower his interest rate to 4.125 percent.

"I broke down in tears," said Salas, who prays that more complications don’t arise.

Salas said no one should have to endure what his family has been through. "Nobody should be treated that way," he said.

Salas’ ordeal speaks to a chief complaint of many borrowers: that federally sponsored loan modification programs offered by out-of-state lenders and loan servicers are plagued by overwhelmed staff prone to losing documents and providing inconsistent or inadequate instructions to homeowners.

Hawaii’s new law allows borrowers to force lenders or mortgage servicers to engage in face-to-face, or teleconferenced, dispute resolution overseen by a professional facilitator before a foreclosure can be completed.

The dispute resolution process was modeled after a roughly 18-month-old program in Nevada that claims 46 percent of mediated cases kept homeowners in their homes. A sunset date for the program is set for Sept. 30, 2014.

Levins, the Office of Consumer Protection director, said borrowers shouldn’t be at the mercy of ineffective loan agents, which he said in some cases involve loan servicers that stand to financially benefit more from foreclosure than from loan restructuring.

"If someone can stay in their home and it makes economic sense for the lender, it’s something that should happen," he said. "It shouldn’t be something that falls through the cracks."

Baker said it wasn’t uncommon for borrowers, who were working with lenders on what appeared to be hopeful loan modification plans, to be informed a foreclosure auction had been scheduled — or that, in rarer instances, their home had been sold.

"That’s not right," she said. "You just don’t treat people that way. We understand not everybody is going to be able to stay in their home, but at least give people some dignity and an opportunity to explore all their options in a fair way."

Mortgage industry representatives opposing the bill claimed that all the new requirements will make loans harder to obtain and more expensive, thereby hurting home buyers and sellers, and stifling Hawaii’s housing market in the midst of a fragile recovery.

Sen. Baker called that claim "baloney."

Levins noted that no opponent of the bill presented any study attempting to support the claim.

Carl Bonham, director of the University of Hawaii Economic Research Organization, said it would be too hard to speculate on the veracity of the mortgage industry’s claim short of a study.

Another fear the mortgage industry raised was that the options for dispute resolution or court oversight would allow deadbeat borrowers to live mortgage-free in their homes for longer by using the law to drag out foreclosure.

Levins said a few borrowers could try to abuse the new law but that obligations of borrowers under the law should dissuade abuse. "We don’t think that’s going to be significant," he said.

Levins said timetables under the dispute resolution program could actually speed up loan modification cases and resolve bad loans — either through restructuring or foreclosure — more quickly, which would benefit lenders.

"We’re not asking lenders to do anything out of charity," he said. "We acknowledge they’re a business. We’re just trying to help people. It’s really a win-win."

Lenders might disagree, but no out-of-state lenders testified against the bill.

BofA representatives met privately with lawmakers and announced plans to hold face-to-face meetings with Hawaii customers at a series of workshops. Wells Fargo announced a similar plan recently.

The Rev. Bob Nakata, a longtime affordable housing advocate and former state senator, said the moves by BofA were too little, too late. "If they were doing this (meeting face to face with customers) all along, the problem would not have been so great," he said.

Out-of-state lenders relied on trade associations such as the Hawaii Bankers Association and Hawaii Credit Union League to testify on the bill.

Local lender associations opposed provisions in the bill, but they also pointed out that they weren’t guilty of shoddy or improper practices attributed to out-of-state lenders, a point on which bill proponents agreed.

The Legislature passed the bill Tuesday, and Gov. Abercrombie signed it two days later. His signing of the bill marked the start of a moratorium on any nonjudicial foreclosures until the dispute resolution process is running, which will be Oct. 1 at the latest.

"This is a comprehensive, detailed, broadly based and extremely researched response to this challenge," he said.


A key provision in Hawaii’s new foreclosure protection law is dispute resolution.

Here’s how it works:

Who can participate?

Owner occupants of residential property under nonjudicial foreclosure. (Nonjudicial foreclosures happen when lenders pursue a foreclosure outside of court, which is the case for most foreclosures in Hawaii.)

Owner-occupants must reside at the property for a minimum 200 consecutive days.

Owners of time shares, vacation homes and commercial property are not eligible.


What is the timing of the dispute-resolution program?

Program will be ready to start accepting applications by Oct. 1.

Dispute resolution proceedings will start Jan. 1.

Program sunsets Sept. 30, 2014.


How does the program work?

Mortgage lenders who pursue nonjudicial foreclosures after Oct. 1 will be required to file a notice with the state Department of Commerce and Consumer Affairs.

Upon receiving a foreclosure notice, DCCA will send information to the homeowner about the dispute resolution program.

Homeowner has 30 days after receiving DCCA’s notice to elect dispute resolution, which is optional.

If homeowner does not elect dispute resolution, the foreclosure may proceed.

If homeowner elects to participate in dispute resolution, lender must participate.

Upon election to participate, DCCA will take no longer than 14 days to set a date, time and place of dispute resolution session run by a neutral, trained professional. Session will be scheduled within 30 to 60 days unless an alternate date is agreed to mutually.

Dispute resolution session shall be no more than three hours but may be extended by one additional three-hour session at the facilitator’s discretion.

If parties reach an agreement, foreclosure is terminated.

If parties don’t reach an agreement, foreclosure resumes.


How is the program funded?

Lenders pay $250 with each nonjudicial foreclosure notice.

Homeowners and lenders participating in the dispute resolution program each pay $300.



» A Hawaii foreclosure law enacted Thursday does not prevent lenders from initiating new nonjudicial foreclosure cases. The law does not stop foreclosures already in progress. The above story stated that the new law places a moratorium on foreclosures until Oct. 1.

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